What the FCA’s sandbox means for UK payments startups

Time and money are of the essence for any startup. For payments and fintech startups trying to innovate in a highly regulated industry, the costly and lengthy process of getting regulatory approval for their product could mean life and death. In order to prevent promising ideas dying on the vine before they can even be tested, the UK regulator, the Financial Conduct Authority (FCA), is opening a first-of-its-kind regulatory sandbox. It’s described a ‘safe space’ where startups can test out products, services and models without having to jump through all the normal hoops to getting regulated.

First announced toward the end of last year, applications for suitable startups are opening up on May 9th and speaking at the Innovate Finance Global Summit (IFGS) in London this week, FCA director of strategy and competition Christopher Woolard stressed this would be as much of an experiment for the regulator as for the first startups going into the sandbox. The envy of fintech companies in other parts of the world, the FCA is widely acknowledged as one of the most progressive financial regulators in the world.

“There will be some unchartered territory where it hard for us to say how to interpret existing rules,” says Woolard, speaking at the IFGS. “We want to be able to give comfort to firms in sandbox that we accept unexpected issues may arise.

“The sandbox is a first for financial services regulation and we ourselves are experimenting and learning.”

Sandbox at a glance:

> Applications open May 9th
> Two annual cohorts to begin with
> Successful applicants will be able to test ideas without incurring the costs and consequences of going through the full regulatory process
> First of its kind globally, other regulators may follow suit if successful

Many rules predate smartphones, let alone biometrics

The thinking behind the sandbox is that fintech startups should have the opportunity to test new ideas, even if what they’re trying to build does not fit within existing rules, which Woolard says often pre-date smartphones, let alone emerging technologies like biometric authentication. The very nature of disruption and innovation means this is likely to be the case with what startups are trying to build and not just in finance. While Airbnb or Uber’s approach of ‘asking forgiveness, not permission’ seems to have worked in the rental and transport spaces, fintech startups typically can’t afford to take such big risks with the law.

“We asked ourselves how we as regulator should go about creating a sandbox where the industry gets the opportunity to test out and develop creative solutions at the same time that there is very little public appetite for failure, especially in financial services,” said Woolard, speaking at the IFGS.

“It would be regulation in proportion to the size and scale of an idea, that can grow as the business grows,” says Woolard. He also says the FCA is looking at how to provide individualised guidance for teams.

UK government boost to fintech

Meanwhile, the UK government is making a fresh push on driving innovation in finance with a set of new measures designed to help fintech startups get off the ground faster and make sure the UK remains one of the best places in the world to build financial technology.

According to Ernst and Young, the UK now has 61,000 people working in fintech and the sector generated £6.6bn in revenue last year and is high on the government’s agenda for driving future economic growth. That’s been the case since 2014 when chancellor George Osborne outlined his ambitions to make the UK a world leader in developing fintech.

Speaking at the IFGS at the Guildhall in London economic secretary to the Treasury, Harriet Baldwin said that the UK has a lot to celebrate in the growth of its fintech sector, but “can’t afford to rest on its laurels”. She acknowledged that the government has an important role to play in driving future growth.

“This is a very strong start – but our ambitions are even greater.” said Baldwin. “We need to ensure that the UK continues to be the best place in the world to be a fintech company.”

New government fintech measures

> Dedicated fintech panel to define and execute initiatives like the open banking standard and pensions dashboard that has been proposed
> Dedicated professional services hub to help young fintech companies source the legal and accounting services they need to build out their companies
> ‘Fintech Bridges’ to connect the UK with key international markets to help fintech startups expand, supported by the UK Trade and Investment (UKTI) department

Baldwin also talked about the need for the UK to start building regional hubs outside London by linking up with local academic institutions and industries, investing in research hubs or appointing more ambassadors like government fintech envoy Eileen Burbidge.

“The UK leads across a broad range of fintech specialisms – from digital currencies to alternative lending, e-commerce and many others,” said Baldwin. “There are few areas of fintech that the UK does not have an interest in. But in a globalised world, there can also be benefits to specialisation. With specialisation comes a concentration of knowledge, efficiencies, and a potential market edge.

“That is why I am keen to see the continued growth of regional fintech hubs around the UK.”

The UK is currently seen as one of the best places in the world to build fintech, the UK government and the FCA are now taking good steps to make sure it stays that way.